The Federal Reserve outearns Goldman Sachs

Wall Street firms aren't the only banks that had a banner year. The Federal Reserve made record profits in 2009, as its unconventional efforts to prop up the economy created a windfall for the government.

The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.

To put this more clearly, "the Fed's earnings for the year will dwarf those of the large banks, easily topping the expected profits of Bank of America, Goldman Sachs and J.P. Morgan Chase combined." The money here is mostly coming from an aggressive policy of buying bonds to lower interest rates, and given that the Federal Reserve can get money for nothing, the yield on those bonds is pretty much pure profit.

That money is going straight back to the rest of the government, which makes sense. On the other hand, I can't help but wish the Federal Reserve would take a quick lesson from Wall Street and hand out some fat bonuses, or maybe some serious raises. It wouldn't be the worst thing in the world if some of the bright young things who flood into investment banks each year thought hard about going into central banking instead -- particularly if we're really going to expand the Federal Reserve's power and make it into a much more aggressive regulator.

Am I missing something here? The Fed essentially prints money and buys bonds. This increases the money supply. Later it sells the bonds as a way to pull money out of the economy. Theoretically it should burn that money. If it gives it to the treasury, eventually the money will filter back into the economy.

This is a serious question. My understanding of finance is pretty basic.

Ezra you're not serious with that last paragraph? It WOULD be the worst thing in the world if we started giving bonuses to those people. Their charter madates them to take the actions they take purely in pursuit of full employment (yea, I know) and stable markets. The last thing we need is give them incentives to do things just to make money. It's already bad enough the Fed system is mostly private bankers dressed up in a civil role.

Let's cultivate a little more suspicion of the Fed's value to our economy please.

bmull - once printed money when in the end goes to Fed, indeed money supply in the Economy grows. When Fed does not do that, I guess it's reserves go up. I believe practically it works as like any other bank except that it creates money and after it has circulated it can keep as reserves. Of course, we will benefit if more learned shed more light here since I can be wrong here.

On side note, if this blog and many pro-Bernanke cohort are touting some kind of smart money making by Bernanke; we need to keep in mind few things:
- Money making in itself is the not the objective of Fed (it can literally print...); bringing stability to financial system and to address future risk (which Bernanke is not doing until he admits Fed's failures, his failures and USA deals with all powerful bankers) are the tasks for Fed.
- This 'return' of $45B is on the balance sheet of at least $1.5 Trillion dollars. So returns you are talking here are 3% or so. Try that and see who has minted money more. You really want to see who has done that, look under the hood of Pimco; the real fox on the Street who knows how to stay away from the trouble and still mint the money.

Coming back to Fed, this news should not be read as to let Bernanke free. He still needs to go for his refusal to own thing here as well as culpability of Fed.

The last thing we need is Fed regulators with an incentive to turn a profit AND the power to determine the rules of the game. It seems like a recipe for disaster. At least in this respect, I think we should be very careful to properly protect the Fed's reputation.

Much as the Republicans don't understand, or don't want the public to understand, pay is often far out of line with social benefit.

A genius who goes into basic Cancer research at a university, or genetic agriculture to fight hunger, or basic solar power research, may create enormous value for the world, but he could make perhaps 1,000 times as much money as a financial derivatives trader creating no net value for society, or negative net value.

A big reason, amongst other long established in economics pure free market problems, is the advances in basic science he makes are impractical or impossible to patent and charge for to all who could benefit from them, so almost all of the benefits accrue to people external (thus the economics term externalities) to the transaction to hire him as a researcher.

The potential for institutions within the US financial system to extract passive earnings and bonuses is on autopilot. It is not necessary to make loans to the U.S. real production sectors in order to create financial wealth, without brick and mortar—indeed without creating jobs. The U.S. financial system has become an ultimate passive income earnings machine for institutions within the financial system.

The sources of the Federal Reserve bountiful net income, $45 billion plus retained earnings come from the financial system that created the financial securities in the first place. The more securities flowing from Government to the Fed, the greater the Fed’s net income earnings and the higher taxpayers’ interest cost on the U.S. public debt to the Fed and also to China.

The debt interest clock keeps ticking away. Real assets and jobs creation are not moving up at the same pace. The uncertainty of re-industrializing the American economy gets frightening.

A step towards repairing the financial system is first to use the Fed’s passive earnings to lower the public debt and reduce taxpayers cost of servicing the public debt. The gains from passive earnings belong to taxpayers.

Out of curiosity how much money did the banks get? The banks own the Fed (via stock) and get paid a dividend on that stock (albeit, one that is limited by the charter), so they should be getting some of the money as well. Any idea how much and to whom? No doubt that money will indeed end up as part of the bonus pool somewhere, although I'd think this would be a small amount of the total haul by the Fed.